Euro area flash’ PMI’s pointing to GDP growth in the order of 0.3% - RBC CM

Research Team at RBC Capital Market, notes that Friday’s ‘flash’ PMIs for the euro area completed the readings for Q3 and overall, they are pointing to another quarter of euro area GDP growth in the order of 0.3%, broadly in line with the post-crisis trend.

Key Quotes

“On a positive note we can say that the recovery has shown resilience in the immediate wake of the UK’s Brexit vote however, equally, evidence of any meaningful pick-up in momentum remains sparse. At 52.6, the September euro area composite PMI was at its weakest since February 2015. That still leaves the average composite Q3 reading only marginally below the year-to date average of 53.1, though the composite has very gradually weakened as the year has progressed. Much of that trend can be attributed to a slowing in activity in the German services sector suggesting a weakening growth impulse from domestic activity in Q3.

The main positive in this month’s ‘flash’ came from the French readings. On the day that Q2 GDP growth was revised down to -0.1% from 0.0%, the strengthening of the September headline composite, which rose to its highest level since June 2015 at 53.3, offered further evidence that growth should rebound into positive territory in Q3.

Overall, this month’s composite reading lifts the Q3 average reading to 51.8, up from Q2’s 50.2, a level consistent with expansion of 0.2% q/q. The improvement was primarily attributable to a strong increase services sector activity.

The manufacturing PMI continues to languish in contractionary territory at 49.5, the seventh consecutive month the reading has been below 50. Output in the sector remained flat but incoming orders picked up strength suggesting this month’s improvement should continue.

Despite weakening, the Germany readings continue to be consistent with solid GDP expansion of 0.5% q/q in Q3. Recent Ifo survey readings had pointed to some emerging evidence that companies were beginning to see a weaker export climate, primarily in the UK. We would expect that to show up in the more export orientated manufacturing sector but the readings for the sector strengthened to 54.3 in September, the second highest this year as output and incoming orders both expanded at a faster pace. By contrast, sentiment in the services sector weakened to 50.6, its lowest reading since spring 2013 as new orders weakened.

At the euro area level, employment growth weakened as services sector employers in particular added workers at a slower pace than in August. There were some positive signals on price developments; prices charged for outputs increased, reaching their highest level since March 2012 though continued competitive pressures reported by businesses to Markit may make it difficult for the continued rise in input prices to translate into higher selling prices.”